Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 30

Federal

DOT proposes safety regulations for shipping crude oil by rail. On July 23, the Department of Transportation’s (DOT) Pipeline and Hazardous Materials Safety Administration (“PHMSA”) proposed new safety regulations for the shipment by rail of crude oil and other flammable liquids such as ethanol. Under the proposed rule, shippers would be required to upgrade older DOT-111 cars within two years. The DOT-111 cars have been under review following train derailments involving crude oil shipments. The proposal would also impose a 50 mph speed limit on trains with 20 or more cars carrying flammable liquids, with a 40 mph limit for trains that include DOT-111 cars. At the same time, PHMSA released a report finding that the classification applied to Bakken crude is accurate under the current classification system, but also reported that the crude has higher gas content and vapor pressure, as well as a lower flash point and boiling point, and thus a higher degree of volatility than other crudes in the United States. DOT will accept comments on the proposed rule for 60 days. For more information please see Sidley’s Transportation Update.

EPA IG Report critical of the Agency’s efforts to address methane leaks from pipelines. In a July 25 report entitled “Improvements Needed in EPA Efforts to Address Methane Emissions From Natural Gas Distribution Pipelines,” the Environmental Protection Agency (EPA) Inspector General (IG) urged the agency to improve its efforts to address methane emissions. The report noted that $192 million in natural gas was lost in 2011 and concluded that EPA’s voluntary leak reduction program has had only limited success. The IG also highlighted that there is some uncertainty over the accuracy of the emissions factors that EPA currently uses to estimate methane emissions from distribution pipelines, with some reports suggesting emissions may be higher or lower than EPA’s current estimates. The report also recommended that EPA address economic and policy impediments that inhibit voluntary measures to fix leaks. Following a White House directive, EPA is currently considering whether to propose additional regulations to address methane emissions from the oil and gas sector.

States

Pennsylvania: Audit critical of DEP’s administration of water quality programs. In a recent audit, the Pennsylvania Auditor General has criticized the Pennsylvania Department of Environmental Protection’s (DEP) administration of water quality regulations for the oil and gas sector. The report, which emphasized the challenges posed by a lack of agency resources, made recommendations to address eight areas of concern, including tracking and response to water-related complaints, timeliness of gas well inspections, accuracy of online inspection reports, transparency of information provided to the public and tracking of drilling-related waste. The DEP submitted a detailed response disagreeing with the report’s conclusions, emphasizing that the audit focused on DEP operations until the end of 2012 and thus does not reflect how DEP currently runs its oil and gas regulatory program. DEP, however, did concur with the report’s recommendations, noting that many had already been implemented.

Colorado: Court rejects City of Longmont’s ban on hydraulic fracturing on preemption grounds. On July 24, a state court judge reversed the City of Longmont’s ban on hydraulic fracturing after concluding it was preempted by the Colorado Oil and Gas Conservation Act. Relying on two 1992 state Supreme Court rulings, the court held the city’s ban on hydraulic fracturing would create a patchwork of oil and gas extraction regulations that would impede the orderly development of Colorado’s mineral resources in accordance with state law. Proponents of the ban are likely to appeal the decision, and the Court stayed its decision pending further appeal.

Business

China: Yuhuang Chemical announces plan to construct methanol manufacturing facility in Louisiana. Yuhuang Chemical, a subsidiary of Shandong Yuhuang Chemical Co., Ltd., announced plans to construct a $1.85 billion methanol manufacturing facility in St. James Parish, Louisiana. The facility will produce 3 million metric tons of methanol per year, the majority of which will be exported to China. The project, which is expected to create 2,700 jobs, will be the first major foreign direct investment in Louisiana by a Chinese company. Construction is scheduled to begin in 2016, with operations commencing in 2018.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 29

Federal

EPA proposes revisions to NSPS for oil and gas development. The Environmental Protection Agency (EPA) recently released proposed revisions to the new source performance standards (NSPS) for oil and gas development, including hydraulic fracturing. The proposed revisions are in response to several petitions for reconsideration of a prior rulemaking and, according to EPA, are intended to clarify requirements for well completions, vapor recovery controls from storage vessels and leak detection requirements for processing plants. In addition, EPA is proposing to eliminate the affirmative defense from civil penalties for violations of the emissions standards caused by equipment malfunction. EPA will accept comments on the proposed changes until September 2, 2014 and has stated it intends to issue a final set of revisions by the end of this year.

States

New York: Court dismisses lawsuits challenging delay in state’s assessment of hydraulic fracturing. On July 14, 2014 a New York trial court dismissed two cases seeking to compel the New York Department of Environmental Conservation (DEC) to issue a revised general environmental impact statement addressing high-volume hydraulic fracturing. The ongoing DEC study, which has been underway since 2008, acts as a de facto ban on high-volume hydraulic fracturing within the state. The court determined that the plaintiffs, who include both landowners and oil and gas developers, lacked standing to challenge the delay in completing the DEC study because they claimed that the DEC’s delay caused them economic rather than environmental harm.

North Carolina proposes oil and gas exploration regulations. On July 15, 2014, the North Carolina Mining and Energy Commission released proposed regulations for oil and exploration activities including hydraulic fracturing. The proposed regulations address permitting, safety, location, waste storage, water usage and chemical disclosure requirements. Once finalized, the regulations will end a statewide ban on the use of hydraulic fracturing by empowering the commission to issue oil and gas development permits. The Commission is accepting comments on the proposed regulations until September 15, 2014 and is required by state law to issue final regulations by January 1, 2015.

Pennsylvania: Commonwealth Court rules on additional provisions of Act 13 on remand in Robinson Township. In response to the Pennsylvania Supreme Court’s 2013 decision declaring that Act 13’s preemption of local zoning for oil and gas development was unconstitutional, the Commonwealth Court eliminated a number of related provisions on the same grounds. Specifically, the court found that provisions that authorized the state Public Utility Commission (PUC) to review the validity of local zoning ordinances and that permitted the state to withhold oil and gas impact fees based on local zoning ordinances were also unconstitutional. At the same time, the court upheld a number of unrelated provisions in Act 13, including the notification requirements in the event of a drilling-related spill, the provision prohibiting doctors from disclosing information regarding hydraulic fracturing fluids obtained for emergency treatments, and provisions permitting the use of eminent domain by companies that transport, sell or store natural gas.

Markets

ACC: Shale development spurring growth in chemical industry. A recent study by the American Chemistry Council (ACC) found that shale development in the United States is leading to significant new investments in the chemical industry. Overall, the study found that 188 projects, representing $117 billion in capital investments, have been designed to take advantage of domestic shale gas production. This represents a yearly increase of 91 projects and more than $45 billion. As a result of shale gas development, the United States is now the leading global producer of natural gas liquids such as ethane, propane and butane that serve as feedstocks for chemical manufacturing.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 28

Federal

DOT considering stabilizers for rail shipments of tight oil. Officials from the U.S. Department of Transportation are meeting with energy companies to consider the use of fuel stabilizers in shipments of tight oil by rail. The agency has been evaluating a range of safety measures and other steps in response to fires from derailed trains carrying crude oil from shale plays. A spokesman from American Fuel & Petrochemical Manufacturers, an industry trade association, stated that requiring stabilizers would reduce the volume of tight oil that could be shipped in each tanker car, making transport by rail more expensive. Government officials believe that lighter, sweeter oil is more combustible, but energy companies have disputed that claim, stating that analyses of the crude shows little difference from other forms of crude oil.

States

Ohio’s Utica Shale play surging. The Ohio Department of Natural Resources (Ohio DNR) reports that gas production from the state’s Utica Shale play doubled in 2013 over 2012 numbers, with oil production rising by 62%. The Department announced that it issued approximately 350 drilling permits in 2014, compared to 85 in 2012, and it anticipates issuing about 800 next year. Drilling opponents have objected to the rapid growth in drilling, citing two recent incidents involving oil and gas wells in eastern Ohio. In response, Ohio DNR has hired more inspectors – the agency more than doubled the number of well inspections in 2013 – and is considering additional regulations regarding disposal of hydraulic fracturing wastes.

Pennsylvania legislature passes new oil and gas provisions. As part of a state budget measure, the Pennsylvania legislature passed new provisions to allow natural gas drilling on state lands and require separate regulation for conventional and unconventional oil and gas operations. The bill will go to Governor Tom Corbett, who is expected to sign the bill. Opponents of the bill have threatened litigation, claiming the oil and gas provisions violate the Pennsylvania Constitution’s single-subject requirement. Previously, bills that sought to establish separate regulatory schemes for conventional and unconventional drilling failed to get legislative support. The Pennsylvania Independent Oil & Gas Association, which actively supported these provisions, has argued that new regulations aimed at hydraulic fracturing should not be applied to conventional oil and gas operators and unnecessarily increase production costs. Leasing the mineral rights on public lands could bring in $95 million in additional state revenue.

International

EU pressing for crude oil exports. A confidential document leaked to the public shows that European Union trade representatives are urging the United States to lift its longstanding restrictions on the export of crude oil. Prepared for the Transatlantic Trade and Investment Partnership negotiations, the document explained the EU’s concerns over its dependence on foreign oil supplies. These concerns were exacerbated when Russia recently shut off supplies of oil and gas to Ukraine. Subject to certain exceptions, the U.S. largely banned crude oil exports in 1975, citing domestic energy security concerns after the oil embargo of 1973 caused crude prices to quadruple. The leaked document, however, criticizes the U.S. policy as “resource nationalism” and urges a “legally binding commitment” to end the export ban. Energy companies and some members of Congress have generally supported lifting export restrictions, and recently the Commerce Department authorized limited exports of certain liquids associated with light crudes. Environmental groups have criticized the EU’s position, claiming, among other things, exports would incentivize more hydraulic fracturing in the U.S.

Greenpeace protests Romanian shale project. Activists from Greenpeace chained themselves to the gates of a shale gas exploration well site in Pungesti, Romania, blocking access and demanding that the government ban the use of hydraulic fracturing. The exploratory site, owned by Chevron, has faced years of delays due to protests even though Chevron will not use hydraulic fracturing during its five-year exploratory program. The U.S. Energy Information Administration estimates that Romania could hold as much as 51 trillion cubic feet of gas, which would be enough to meet the country’s demand for natural gas for roughly 100 years.

Litigation

Chesapeake’s win in shareholder suit affirmed but will head to trial on collusion charges. The U.S. Court of Appeals for the Tenth Circuit affirmed a district court ruling in a shareholder suit against Chesapeake Energy. Plaintiffs claimed that financial arrangements with co-founder and former CEO Aubrey McClendon that allowed McClendon to buy a stake in every well the company drilled, and finance his stake through the same banks that loaned funds to Chesapeake, created a conflict of interest leading the company to over-borrow to the detriment of shareholders. The Tenth Circuit affirmed the district court’s ruling that there was inadequate evidence to show the company acted recklessly or had intended to defraud shareholders. In Michigan, however, a trial court judge declined to dismiss criminal charges that Chesapeake colluded with Encana to drive down prices to lease land in the Antrim shale field. Two related antitrust charges were dismissed. Encana previously pled no contest to a misdemeanor and paid a $5 million fine.

Business

Permian Basin outgrows pipelines, turns to rails. As oil production in the Permian Basin continues to increase – up 79% since December 2009 – drilling companies are increasingly looking to ship crude by rail due to constraints on pipeline capacity. With the temporary closure of a Phillips 66 refinery in Borger, Texas, production now exceeds takeaway capacity by approximately 300,000 barrels per day. Producers are trying to make up the difference by shipping the crude out by rail to avoid steeper discounts in oil prices. West Texas Sour crude has already fallen by $11.50 per barrel when compared to West Texas Intermediate. Resorting to the rails, however, is expected to be a temporary measure. The Phillips 66 refinery is expected to return to service within a month and new pipeline projects by Occidental, Plains All America and others are expected to add another 700,000 barrels per day in takeaway capacity by 2015.

API introduces guidelines for community relations. Industry group American Petroleum Institute has published community engagement guidelines to serve as best practices for companies working in shale plays. The guidelines will help companies address community concerns responsibly and enhance the long-term benefits of development to local communities. The guidelines call for drillers to communicate with local residents and municipalities regarding environmental, health and safety practices throughout the drilling and production process. The guidelines provide a framework for addressing issues that arise during active shale development, such as from increased truck traffic and resulting impacts on local roads, as well as to better ensure residents that wells are safe even after the drilling rigs are gone. The guidelines have taken on more importance with the growing movement for local governments to exert more power over limiting, or even outright banning, hydraulic fracturing.

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Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 27

States

Colorado: Supreme Court allows ballot initiatives to proceed. The Colorado Supreme Court rejected challenges to state-wide ballot measures that would seek to amend the state constitution to allow local governments to ban or restrict hydraulic fracturing. The measures also would seek to block regulatory taking lawsuits by owners of mineral rights if local municipalities were to enact drilling bans. Industry groups had challenged the initiatives, arguing that they were misleading and improperly addressed multiple subjects in a single initiative, in violation of Colorado law, but the court rejected their arguments and allowed the measures to move forward. The ruling clears a path for these initiatives to appear on the ballot in November, but only if supporters collect 86,000 signatures.

International

German energy and environmental ministers seek ban on shale oil and gas drilling. Germany’s departments of energy and environment proposed regulations this week that would ban drilling for shale oil and gas over the next seven years, citing concerns that drilling could damage water supplies and the environment. The proposed legislation would curtail Chancellor Angela Merkel’s original plans to end the country’s de facto moratorium by introducing legislation to regulate hydraulic fracturing this fall. Instead, the proposal upholds bans on the use of hydraulic fracturing, but would allow conventional drilling and drilling for exploration. Shale oil and gas development is a hotly debated topic in Germany; many Germans oppose the use of hydraulic fracturing, but are also concerned about Germany’s continued dependence on imported natural gas. Experts estimate that Germany sits on approximate 81 trillion cubic feet of shale gas.

Litigation

Federal court dismisses drilling disclosure case. The U.S. District Court for the Middle District of Pennsylvania dismissed a doctor’s complaint for lack of standing, finding that he had not suffered any injury from a state rule limiting doctors’ access to drilling operations’ chemical lists. Pennsylvania’s 2012 oil and gas law allows doctors, and other health professionals, to obtain a list of hydraulic fracturing chemicals used during drilling operations as long as they sign a confidentiality agreement. The complaint alleged that the law hinders doctors’ medical practices by preventing professionals from consulting with one another. The district court decision deviates from a similar lawsuit pending in state court that found a doctor did have standing to challenge the law. The state case is currently being reconsidered by a lower court.

Research

Report links Oklahoma earthquakes to wastewater injection wells. Researchers from the University of Colorado and Cornell University recently concluded that four high-rate disposal wells in Oklahoma City likely induced a group of earthquakes known as the Jones swarm, accounting for 20% of the seismic activity in the central and eastern United States between 2008 and 2013. According to the report, seismicity can be induced up to 19 miles away from a disposal well. The researchers, who reviewed 89 of the over 4,500 wastewater injection wells in Oklahoma, believe the vast majority of wells in Oklahoma are operating without effect. Oil and gas industry representatives responded to the report with skepticism, noting this report is just one part of continuing research into the increase of seismic activity in Oklahoma. Government regulators and researchers have likewise been looking into the issue, but to date have not recommended any regulatory changes.

Business

Black Hills sand may be suitable for Bakken shale drilling. In spite of an earlier state report that could not locate suitable sand in South Dakota to be used for hydraulic fracturing in North Dakota’s Bakken shale, South Dakota Proppants (“SDP”) recently located sand that has the properties necessary for drilling operations. SDP plans to build South Dakota’s first frac sand mine near Hill City. The proposed mine could employ up to 300 workers and make $65 million a year in revenue. Before proceeding, SDP will need to obtain permission from the Board of Minerals and Environment and secure water permits through the Water Management Board, processes that could take up to two years to complete.

Companies market new biocides for use in hydraulic fracturing operations. Two companies, Integrated Environmental Technologies (“IET”) and Universal Bacteria Specialist (“UBS”), have begun to develop environmental friendly biocides to use during hydraulic fracturing operations. Biocides, compounds used to kill organisms and bacteria that interfere with oil and gas extraction, are regularly used but often made with harsh chemical materials. IET’s product, Excelite, is made with hypochlorous acid, a nontoxic compound first discovered inside humans. UBS’s biocide, Envirolyte, converts water and sodium chloride into biodegradable materials that can be used in hydraulic fracturing fluid. More eco-friendly biocides will likely be developed by competitors as the market for these products is expected to grow along with the increased production of shale oil and gas.

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